Surveillance: Dollar's Power Here to Stay, Bloom Says

I mean the amount of people that I've heard over the last couple of days saying I want to buy Europe and I'll want to buy Europe for income. I want to buy Europe for income for the dividend. What do you make of the argument, Lindsay, Well, I think it just talked it. It goes to show you how nervous people are in this environment. UM, and the valuation in Europe has come down so significantly too. You can

actually see some good value there. Um And I think that you're seeing in general over the last several months, investors flocked to defensive sectors like real estate has been in the US outperforming UM most other sectors. Uh, consumer staples is another one that's been doing quite well. Um, and we're looking for healthcare to pick up some slack too. So this has been the story for me of the

last couple of months. The headline numbers scream record highs, all time highs, and maybe tell a story of exuberance. Beneath the surface, it's a really defensive rally, isn't it. Utilities, consumer staples. What's the story that talked to us about it? No, you're absolutely right. While the market overall is, you know, hitting new all time highs. The SMP five up almost twenty on a year to day basis, and it's trading at a rich valuation right now, nearly eighteen times on

a Ford pe basis. So not all is cheap, but it just doesn't feel exumer And underneath the surf attention to your defensive call is people are putting a premium on revenue growth in selected sectors as well. Is your defensive call because that belief in the revenue growth is going to disappear or diminish partially, you are revenue growth

is expected expected to slow precipitously in some sectors. I'm buying nine or ten percent or revenue growth, and I'm paying a huge premium for that privilege, right right exactly. So financials or is one area. Healthcare is another area. Healthcare has always been done extremely well from a revenue and earnings perspective every single quarter. They don't always get

the credit for it. Um But also, you know, you see investors flocking to your point to the tech sector because because they do want that growth, and that's where you're getting top line growth. Bottom line growth is expect change. What what will change the desire on a microeconomic basis the demand function for that tech revenue growth. You know, I think it's going to be difficult for it to change because tech is one sack there where investors actually

feel very comfortable. Despite the defensive sectors doing well, tech is still the best performing sector on a year to date. Thank you. That's important state a believe that will continue. Yes we do. We're overweight the technology sector, will also overweight the communication services sector, which is an interesting play between that growth techy growth and defensive because you've got Google and Facebook and then A T and T and Verizon were those are the four largest companies in that sector.

So you're you're bundling Verizon together with Google, not me. That's what the SMP five hundred is doing. The recalibration last year where they created the communication services sector out of the telecommunication services me neither, But what did they do with ana kind of copper? Save me? John? Did you see BSF this morning? Yes, imagined twice on air. I dazzled could be fit percent. You're so gloomy levels that blaming trade's the scapegoat for this, you know, I

don't know if it's the scapegoat. I think it's reality. The trade is actually having an impact, and I think this is going to be the quarter where you start to hear corporate management teams really talk about the numerical impact UM and they're gonna take numbers and guidance down for the second half of the year. The second half of the year, you have a Q four that's expecting

nearly seven percent earnings growth. That's gonna probably have to come down if trade there's not you know, a resolution at least on the tariffs in the near term, because as we discussed earlier, Tom, you're seeing the economic data in China, especially very much weakened. That's starting to bleed into Europe and at some point it will impact the U S Here, Lindsey, thank a good day to catch

up with our Christopher Whalen. He has a number of books out and the one I would really highlight, folks, is his one volume Inflated, which is a fabulous walk through of the financial history of the United States of America. It is a different financial history then Germany. And he joins US now Chris Whalen on uh Deutsche Bank as well. Just just you know, two days into the saving plan, just your general thought and a likelihood that Deutsche Bank

can execute this plan? I think low, tom My, guess is that what we're watching here is the final death struggle before the bank ends up being acquired or merged. What is the what is the reaction function that is key here? Is it a revenue dynamic? Is it a cost dynamic? Is it a capital raise dynamic? Capital raise is not possible at this point. The stock is trading below book value. All banks, at the end of the

day live or die based on profitability, not capital. They have to have the profits to deal with problems and keep going, as the US banks illustrated a decade ago, and that's just not been the case in Europe as such as Deutsche mek Toom. The whole continent has a basic problem with bank profitability and you can see it in the stock prices. Even Santon they are, which is a reasonably healthy, broad based institution, is down thirty this year. So Chris, let's talk about that. What is it about

Europe that is so difficult for a bank to make profit? Well, the role of the state in terms of financing. You have, you know Germany, for example, you have all different types of state institutions that provide most of the basic finance. You don't have an asset backs earties market as you do in the U S which was enormously important to helping us recover from the two thousand and eight crisis. It came back within months, and so you you lack

these basic pieces. In Deutsche has been forced to look externally, not in Germany for opportunities. And it's so strange when we hear the CEO talk about going back to the old model. Well, that's seventy years ago when they banked small and medium sized enterprises. They have stopped doing that. They gave up their foreign markets. The French didn't do this. If you look at Associetation General, look at B and P. They still have a basic lending business to small and

midsized enterprises, which gives them deposits. So Deutsche looks a lot like City. The only difference is is that it doesn't have a big consumer finance business as City does, which makes a lot of money, and that is a problem. I've often joked and and frankly I was more than half serious. I said we should just merge Deutschan City because they have capital markets, they have global payments, they have some important back office functions which I've been very

concerned about. And it might make sense, but I don't think the Germans are willing to do it. Number one. Number two, you can't even talk about it in Europe. The politics are so poisonous, so you can't even mention the word bank and eight things to talk about Chris Whalen. But there's a lot of people walking out of the doors down on Wall Street today with cardboard boxes in their hands. How do you go about getting another job in New York in the mill you were in right now?

I mean, is it you just assume you're going to go to a boutique firm well, that's certainly what I did. Um. I have specialized on the world of mortgage finance, which is a bit of a ghetto. Most of the public companies that are trade well below book value that you're a ghetto kind of guy. So it works well. Yeah, but it's an important sector. And this is one of the things about Deutsche Bank that most people don't know. They're very important in the world of both residential and

commercial real estate. So these people have skill sets. You're saying, of the eighteen thousand people, some of them have some genuine skill sets. Yes, those that can differentiate themselves can stay in this business. But it's eat what you killed today. Tom. You know that the investment banks aren't handing up big salaries anymore, and I think for most people they're gonna have to go find something else. Do you want to make a six percent coupon? You can do that with

Chris Whalen Chris Let's review from eight years ago. You're courage to say, shut up and buy the banks. But you did it through a high coupon preferred stock. How did that work out? It works great? They're boring. I own US Bank, I own Cities Trups, which we're awesome. In December they were yielding double digits and Bank America preferred, and I buy them for income. My beautiful wife has most of my money issues a private banker, and we're both in the world of investments, so it makes our

lives a little simpler in terms of compliance. But I look for income. I look for idiosyncratic financials. Where are you looking right now? I mean, if the JP Morgan story is over and you know expercent look good earlier, you know, is the play been made in a high yield American banking securities for now? Yes? I think the banks are gonna have some weakness in the near terms simply because of interest rates, and that interest income is

slat and it will be going down again this quarter. Um. I think there are credit concerns out there that will cause investors to lighten up on financials after loading up on them two years ago, and then you can go shopping. But to me, what is in prospect is that the FED may allow the next down cycle to chew up many of these non banks that are competing with the banks today, and then the banks are going to be a huge by tom are going to end up with monopoly.

I want to go to your book Financial Stability. Where's the instability now? Is it leverage loans? It's somewhere that we haven't identified yet, but come on, but you're thinking about Chris, you did this a crawl. You're doing it at Whalen Global Advisors. Is it leverage loans? It's in bonds. It's not directly in the banks, but the banks have indirect exposure and that's what people worry about. Okay, Chris Whalen, thank you so much for the update. Greatly appreciate it.

I can't say enough from a decade ago, the prescient nature of his read through of American financial history order Romini writing a nice forward to his book, Inflated. Can you imagine David's loom as an ambassador for anybody? Hsv C Global head of Currency Strategy joins us, Now do you want that job? Blew me. I'm no ambassador. Say it's strike luck. I think so. No, you're like the least diplomatic currency strategist I've ever met. David. Talk to

me about the dollar. All these calls for the dollar to go weaker, weaker, It's not happening. That's your view, isn't it. Yeah? It's not happening. They need a bit of a brush to scrub the egg off their faces. Even when the market are just a couple of weeks ago, is passing in fifty by the Fed, the dollar was hardly selling off the dollars powerman. It's yet to stay. It offers high yields, it's a great currency. So many people look at rate differentials. They think the rate differentials

reassert themselves. They believe that the Federal Reserve needs to cut rates, and that rates must narrow between the United States and Europe, and therefore dollar weakness. Why is that the wrong way of looking at it, David, Because at the zero bound of interest rates, the way you rate is not symmetrical. So the ECB can only copen and

the Fed we could cut twenty five. So let's imagine on the same day the desire to cut and the ECB says things are going wrong in Europe, and the Fed goest things are going wrong in the U S and they're both cut on the same day. The one cuts twenty five, the other can only cut ten. Where you're saying that's positive for euro No, it's not. They

can't cut more than ten. So that's the problem at the zero bound of interest rates, when your negative territory, the mount you can cut is limited, and you interest rate deferential doll that you used to see where things are. While you're flying this plane through financial markets, you look at the doll. It's broken. So forget about interest rate

differentials from that perspective. But if you look at one your money where one your money can fall a long way, you're getting offer nearly two and one your money in the US, guaranteed by the U S taxplayer. It's beautiful. And what's important, folks, is this will be a podcast with Professor Bloom and what you just heard there was absolutely brilliant about the zero bound. Are we in a liquidity trap? I know it's an economist question, but a

foreign exchange is a litmus paper of the system. Does it is suggest some kind of liquidity trap where monetary policy can't work. Well, we would argue it's even worse than that, in the sense at according to the US administration, now you can't use your currency as a lever and put your problem onto another country. This is now unacceptable practice. So before, when all the leavers were tied up, you might do quei and that drives your currency down, and

that helps you, but now you're at risk. If you drive your currency down deliberately against the United States, you're at risk of a backlash. You know, the US administration is not prepared to have the dollar as your your your puppet, and this is changing the way we didn't foreign exchange and it's changing the world. So that extra lever that you thought you might have by manipulating your currency, this has all gone also out of the toolbox, and that puts us into a much narrower paradigm of what

you can get away with it. Davis put a little bit more meat on that phrase backlash. What does a backlash actually mean? How does that play out in practice? What do they do well? We've seen that in terms of threats of tariffs, in terms of trade wars, in terms of you know, people countries getting upset with you and actually doing something about it. So when Albey came in in Japan, that did Kwie and Dollyan went from eight twenty five, and this created some inflation in Japan,

but at someone else's cost. You can't do that anymore. The US administration doesn't want you another country to manipulate the dollar. At your own gain for someone else's expense, and they say, we've had enough of this, and you know that is the part of the backlash. And with the unit, we've seen threats of tariffs, so you can't just use the currency as a tool willy nilly anymore without thinking there may be some repercussions set up the range of some of these major pairs against your dollars

stability and even dollars strength. What does euro drift to? What does Yan drift to? Well, we've got Euro drifting down to one ten. We've had it the whole year, you know, to break one ten, something new fundamental and different tests happened and I can't see it at the moment, Tom, I think you know, both economies struggling a little bit dead on the devilsh side, DCB on the dovish side.

So you know, drifting down of the drifting down. You know, these are the currencies, the dollar, you know, having a nice little drift, a small little current, you know, which won't carry you away play nicely in it. If you're one of those tubes you get carried on the lazy river. You know, tell us about sterling farall, you know, we're trying to base season tickets to the charts me and generals Sherman, Can I translate for you called Tottenham Hospers

the charts? Yeah, you know, you know, I mean, is that the rate? Yeah, I mean I'm gonna enjoin on one nineteen. You're going to be eating the beautiful prawn sandwiches as well, coming with your beautiful dollars. So um, yeah, look at Sterling's under pressure. People are worried about the no Brexit scenario. There's a lot going in basically on Parliament at the moment. We've got a leadership contest. You know, we change the data of Brexit from basically April Fools

to Halloween and that tells you something about it. So basically, you know, Sterling is under pressure all the time. The only way that student is gonna really show a massive bird is if we get some kind of deal, and that's what we're all hoping for and that's what we think is very still possible in the HSBC world. And

just there's the prawn sandwich brigade. Yeah. Well he just said to me he was making little posh seats at the point of Tottenham and you sit in the posh seat to go buy yourself of beautiful, proud and sandwich Sirenlex Ferguson of Manchester United. When he used to complain about the atmosphere at Old Traffic, he would say, the fans are sitting there eating their prawn sandwiches and aren't making any noise. That's David Bloom is not a football

fan anyway. He likes m m A. He likes the mixed martial arts, he likes the UFC, that kind of stuff. I have no idea. And the sports called rugby and cricket. I'll show you pictures one day. They played mostly in the old Empire. David. We're going to before you cause anybo. Thank you so m HSV strategy Tom Psly joining us now our BC Capital Markets chief US economist Thomas. We look ahead to Chairman Pou What are you looking for?

You know, it's this is the outstanding question at this point, and I'll tell you what I think he should say. I think he should say that things look really good in the United States. We couldn't be happier with the piece of job growth. We uh think that the economy does not need cuts right now. Um, this is what we think you should say. Um, it's, you know, given what he has been sort of hinting at and when others have been hinting at, I don't know if that is what he is going to say, but um, that's

what he's supposed to be saying right now. This economy does not need job cuts as job cuts you see, just economy does not need uh pit funds eating. Um, this economy needs I'm gonna defend that is going to show support. Um. But at this juncture, we don't we don't need cuts. What is the price of waiting from July thirty one to September eighteen? I would suggest it's next to nothing. It is absolutely next to nothing. And again but it even begs the question Tom, it's you know, well,

do we need cuts in September? Well, I don't know, but you know, we'll see the data. And there's a whole group of people we talked to Tom who are looking for a rate cut right now. But the answer is, if you just wait six weeks, aren't we all a lot smarter? I think that's absolutely true, and and and I think that's a completely fair way of of of thinking about And what I would say is, if you

do want to wait six more weeks. I think in six four weeks you're gonna see exactly what you see right now, which is, hey, a backdrop that actually looks pretty decent and does not need any cuts at this point, Tommy through an argument that they've already talked themselves into an interest rate cut, and then we have loose financial conditions, largely because the Federals have got us here, and now they're in a position where if they don't cut, they're

going to face a little bit of a market santrum. What are your thoughts on that situation? So, I think what the market has to recognize is what, you know, why is it tantruming right? Right? You know what what is actually going on in the economic backdrop? You know it's it's funny the Feds, f R b U S right, this is there, the big macro model, right furboce um. You know we and let me be very clear, we

don't happen to love that model. Um. It's uh and and all models suffer from various limitations, not the least of which is it's not the real world. Right, You're you're creating this sort of this perfect environment um in in a model um sort of you know, spit out some output. But here, but let's just walk through, uh this idea for a second. If if you were to put a fifty basis point cut into the FEDS um model. Um, again, all else equal, a fifty basis point cut is only

worth a couple of tends to growth. I mean that that's actually what you would be adding to growth at this point. So again, that sort of naturally begs a question, you know, why are we cutting rates? Cutting rates? Begin to what to get to? One ad from a growth perspective. They have a meeting. The thirty one job's day is August two, two days later, forty eight hours later. Do they know the numbers when they have their meeting? For which for does the Fed? Does the Federal at twelve

noon on January thirty, July thirty one? What the job numbers are going to be at eight thirty on August two? No? No, no, come on, I mean, look, I that number comes out a few days later. Most of that report is compiled at that point. UM. So sure, I mean, you know, I think Tom, you're you're raising the right question. It's Oh, if they cut we're gonna get a really bad jobs number. I completely look again, I hate to be the practical one in the in the room on this. It's fun

to be impractical. But but but let's let's just be clear. The FED is already looking for much slower job the whet anyone else's forecasting. Like, if you look at their forecast, they actually had the unemployment rate rising over the course of the next couple of years, what's their non farm payroll equipment they are They run into a hundred thousands, if that's exactly my point. So if you actually have an increase in the unemployment rate over the coming couple

of years, then you necessarily write the math. The math behind it necessarily says that you're looking for below brick even from a job growth perspective, and brick even is, you know, sort of some one thousand right now. So the FED already has we got through Tom Perselli without talking about wage growth. Tom Priselli, thank you so much, OURBC Capital Markets A nice briefing there. Paul Sweeney is out at the RAM. The RAM has been there since ninety seven, sun Belly, Idaho. And you know it's like

a manly breakfast. It's like a eggs and steak and the whole thing in a bud. Yeah, chaser for breakfast as well, and uh, he joins us right now on the edge of catch them in Idaho PASSWHENI why are you in the gorgiosity of Idaho? This morning? I am

at the Allen and Company conference. Allen Company is a a boutique investment bank really focuses on the media and technology sectors, and they throw this conference every year in Sun Valley and it just brings together Tom and Li says, some of the you know, the leading players in media, entertainment, technology, telecommunications, and they all come together here in Sun Valley to kind of get a sense of the future trends of their businesses. But really they come together, uh, to talk

to each other. And what happens many years is a lot of M and A transactions are hatched, Okay Valley, and those are things we read about during the year. What's the level of sweat out there this year? I mean, I know scale is in and all that, but what's the level of sweat you've discerned already? I think it's

pretty high at here despite the low humidity. But I think it's pretty high because I think a lot of these media companies that have historically been the stalwarts of this conference look around and they say, we're not just in the media business. We're in the global technology business. And you know, we're looking against uh, we're competing against

Facebook and Google and Apple and Amazon um. And when you think about it in those terms, a lot of the traditional media companies say we need to either get bigger or we need to get out. And we've seen over the last couple of years some big, big media companies already decided to kind of get out. Time Warner sold the A T and t Rupert Murdoch sold most of his company to the Walt Disney Company. So I

think that trend is still very much play here. Well, one thing that I'm wondering, Paul, is, first of all, is how you get the gig to go out there, because right now I'm looking at the weather and it looks pretty amazing. They're not. There's not much squeaz forty four degrees right exactly beautiful. But Paul, I I do want to know from you, Uh. Scale can mean many things, and we've seen from some of the big industrial companies they've been starting to break themselves up at this point

because scale has been ineffective. What is the crucial scale to get in media right now? Is it a content game? Is it a you know, a bandwidth game? What is it? It's a couple of things. Number one. I think it's it's a content game. I think if you just think about the uh the TV business, UM, the big disruptor over the last five or six years has been streaming

of content. And of course when you think about streaming, you think about Netflix and and Bob Iger the Walt Disney company, that is his number one focus is a Netflix and the ability to have a direct to consumer relationship so that you can stream your content director to consumer with with without a middleman like a Comcast or

a direct TV uh. And so we've seen the Walt Disney company, you know, basically double the size of its company about buying Fox just to get more content so that they can create direct to consumer relationships much like

Netflix and and on a global scale. What are we learning about use of debt If we've had transactions where we've said the debts up to our eyeballs, we've got a migrate out regional sports networks just to salvage the debt picture, is this debt affected or can they actually do it by you know other other m and a ways. The media industry um really you know, enjoys a debt

because these are big pre cash flow businesses. And so the credit markets, whether you're the JP Morgan banks or the high yield market, Uh, they love to lend to the media communications sector. So you take a look at a T and T is the biggest borrower outside of the financial sector, um and now, and that's just fine. Comcast is also a big borrow. So these media and tele companies they enjoy the ability to use their stock. Also they can go to the debt markets and only

level up these businesses. Bloomberg says this morning when Paul Sweeney and Sun Valley, Idaho, Lisa brand wants and Tom Keane not there. This part of Bloomberg Surveillance brought you by the Needery Breakfast and Sun Valley including are you ready for this? Lisa Eggs black Stone. You think Steve Schwartzman was about eggs and black Stone poached eggs with a grilled season tomato. Thomas is English muffin top a

chop bacon, home made. I mean Schwartzman's. Schwartzman's got his own eggs Benedict out there, Are you trying to make me like you're trying to create strife between me and my co hosts? We say good morning, we say good I'm glad Tom that you brought up debt, because that really is my question. Is there an eagerness to get deals done now? All debt markets are super hot, while there's less demand than there is there's less supply than there is demand right now to buy risky assets. I

think so absolutely. I think the UH A lot of the companies recognize that they're really in a in a fantastic position. You're given the debt markets um and their stocks. Many of their stocks are trading a very high valuation. So when you think about some of these acquisitions, whether it's AT and T or Disney making acquisitions, a lot of these companies feel like they're in a very strong position. Asked the private equity companies, if you know you mentioned

you know the folks of Blackstone and KKR. We've seen Apollo out buying TV assets over the last year, and they're doing all with debt, levering up the who's going to advantage who's got the big who's got the biggest pot of money out there? Is it private equity? Is it Jeff Bezos? I mean, who's stupid rich out of Ellen company? Right now? I think some of the technology companies, you know, we we have, you know, there's stock prices are so high, they're sitting on so much cash. The

bar and rates are so low. You know, every year we come out here to the Sun Valley Conference and the question is when will we see a big technology company, whether it's a Facebook or Google or an Amazon, really step up and make a you know, a huge acquisition in the content space to kind of round out their portfolio. We haven't seen it, but that's kind of what the bankers here, I'm sure are, you know, pitching those deals left and right. All right, So Paul, please look into

your Christal ball. Which mergers or acquisitions should we be expecting to hear about. I think some of the things will see probably in the next year. Um, you know kind of what when you're talking to a lot of investment bankers is they say a lot of the smaller companies like MGM, lions Gate, even Sony Pictures, Uh, all those are content players. Um. You look at Univision. Univision is the largest Spanish language media company in the US.

They've actually kind of got hired some bankers and looking for a deal and maybe even Discovery Communications. They've bought Scripts Networks. They've gotten very big, but are they big enough? Maybe not? Major shout out in May of this year, Mr Iger and Disney. The peak is exactly a four standard deviation leap in Disney shares and they put it on two months in a row from there. Paul Sweeney out of Allen Company, Sun Valley, Idaho. Thanks for listening

to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.